Now that Kraft Foods (NYSE:KFT) has made its hostile bid for Cadbury it is worth remembering what a hostile takeover offer is. It is one that the directors reject – not necessarily one the shareholders oppose.

Cadbury’s (LON:CBRY) board may well be reading its investors’ opinions correctly and it has had plenty of time to sound them out in the two months since the American company declared its bid intentions. But too often incumbent boards reject a takeover approach automatically.

Directors of the target company are inclined to regard fighting for its independence as an objective when it should be shareholders’ return that is paramount. In many cases, defending the company’s independence is an excuse for defending their own boardroom position.

For founder directors, the prospect of losing control of their company against their will is painful. But the price of bringing in outside shareholders is that they have different agendas – and selling out may be one. The Forte family found that when Granada bid for their hotels group: the founders wanted to retain their company but the shareholders wanted a profit.

Hostile takeovers were unknown until the 1950s when Tube Investments bid for British Aluminum and they remained unknown in many countries, especially Japan, for decades. But they are a useful strategy when incumbent directors resist changes of ownership that can lead to changes of methodology and improvements in productivity.

Not all directors who oppose hostile offers are being Luddite, however. Sometimes they can see the future value that the bidder has also seen and think existing shareholders should benefit from it. Sometimes opposition is a tactic to holding out for better terms.

Treasury minister Lord Myners has delivered several speeches saying investors should be long-term holders taking a greater ownership interest in a company. That does not mean they should not sell however, either in the market or to a new owner.

With a cash offer they move on and invest elsewhere, but with a part-paper bid like Kraft’s they must decide whether to be part of the enlarged group – remaining a Cadbury investors through the parentage of the American company. That means taking a view on the bidder’s prospects and suffering if the bidding company has overpaid – or selling out of the new owner.

But it is for shareholders to decide Cadbury’s fate, not the directors. The board can make the case for staying with the British company, but that is the job they should have been doing before the bid arrived.

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